What is financial independence?
Financial independence is the ability to cover your needs and purchases without the need to work actively or depend on other sources of income. This usually means that your passive income, such as investments, dividends or annuities, is enough to cover your expenses.
Thus, we will not base our calculations on sky-high incomes, but rather an average income with which most French people can identify. The latest official data on the median salary according to INSEE gives us a net amount of around 2000 euros per month. This is the salary we will use for our simulation.
How much capital is needed to earn 2000 euros per month passively?
There are many ways to earn returns passively. Whether it is life insurance in euro funds, the stock market or real estate, the average return obtained annually on each type of investment must be calculated to estimate the size of the required capital.
Life insurance for risk-free returns
One of the best ways to get a return without taking risks is through life insurance and euro funds. These funds offer a return of around 3% per annum. It’s not much, but it’s guaranteed! On this type of investment, you would need a capital of 800,000 euros to get 24,000 euros per year, or 2,000 euros per month.
Please note: this does not represent a net gain: when withdrawing the interest received, taxes must be deducted and its amount can vary according to many factors, including the age of the life insurance contract.
Invest in the stock market to achieve financial independence
According to the Financial Markets Authority, the real return, i.e. inflation deducted, of CAC 40 shares (dividends reinvested) over the last 35 years has been around 7.2%. To earn 2000 euros per month, you need a capital of “only” 333,300 euros. If we apply the single flat-rate deduction of 30% on capital income, the amount of capital needed to earn 2,000 euros net of tax increases to 476,190 euros. Of course, it is a high amount, but we are far from the 800,000 euros for life insurance!
All this is very attractive in theory, but in practice, you will have to be patient and show composure during bearish market periods. That said, it’s an excellent strategy for building long-term wealth.
In the short term, unfortunately you will not be able to get good results withdrawing 2000 euros per month from your capital. Because yes, this theoretical return implies that there is no waiver for several decades!
What about real estate in all of this?
Real estate is one of the favorite investments of the French. But what real estate assets are needed to achieve financial independence?
The return on a real estate investment depends on the type of property and its location. Some cities in France offer a return of up to 6%, which is very interesting. To receive 2000 euros per month, you therefore need a capital of around 400,000 euros. Of course, this capital must be fully available for investment: using a loan will mean that all or part of your rent will have to be used to pay the monthly loan payments.
Strategies to adopt to approach financial independence
Financial independence is a long-term goal. The good news is that in the world of investing, time is on your side. Of course, building a significant capital is not for everyone, but small rivers make big rivers, and the adoption of a few good practices can make a difference over the years.
Live below your means
Income is the most important element in achieving financial independence. However, your expenses and lifestyle are just as important. To start building a savings, you must first have the ability to put money aside each month. To do this, it is necessary to establish a monthly budget and spend an amount less than your income. To get closer to your goal faster, avoid unnecessary expenses and focus on your savings.
Invest regularly
The key to success is consistency. To achieve financial independence in the future, it is important to invest regularly. If you like to invest in the stock market, do it every month, without necessarily paying attention to short-term market movements. Another good strategy is to invest in dividend stocks, and reinvest those dividends in new stocks. Whatever your preferred investment method, make regular contributions.
Define the goals
Establishing well-defined financial goals is essential to achieving financial independence because it allows you to give a clear direction to your efforts. Goals provide motivation and a measure of progress.
Invest in yourself
Your financial situation is not set in stone. It is always possible to invest in yourself to gain knowledge that can improve your income. Training, specialization courses, a career change or even networking can improve your financial situation over time, and thus allow you to increase your savings in view of eventual financial independence.
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